# EUR-Lex - 52013DC0353 - EN

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# 52013DC0353

**Recommendation for a COUNCIL RECOMMENDATION on the Czech Republic’s 2013 national reform programme and delivering a Council opinion on the Czech Republic’s convergence programme for 2012-2016 /* COM/2013/0353 final */**

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Recommendation for a

COUNCIL RECOMMENDATION

on the Czech Republic’s 2013 national
reform programme
and delivering a Council opinion on the Czech Republic’s convergence programme
for 2012-2016

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty on the
Functioning of the European Union, and in particular Articles 121(2) and 148(4)
thereof,

Having regard to Council Regulation (EC) No
1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary
positions and the surveillance and coordination of economic policies[1], and in particular Article 9(2)
thereof,

Having regard to the recommendation of the
European Commission[2],

Having regard to the resolutions of the
European Parliament[3],

Having regard to the conclusions of the
European Council,

Having regard to the opinion of the
Employment Committee,

After consulting the Economic and Financial
Committee,

Whereas:

(1)       On 26 March 2010, the
European Council agreed to the Commission’s proposal to launch a new strategy
for growth and jobs, Europe 2020, based on enhanced coordination of economic
policies, which will focus on the key areas where action is needed to boost Europe’s potential for sustainable growth and competitiveness.

(2)       On 13 July 2010, on the
basis of the Commission's proposals, the Council adopted a recommendation on
the broad guidelines for the economic policies of the Member States and the
Union (2010 to 2014) and, on 21 October 2010, adopted a decision on guidelines
for the employment policies of the Member States[4],
which together form the ‘integrated guidelines’. Member States were invited to
take the integrated guidelines into account in their national economic and
employment policies.

(3)       On 29 June 2012, the Heads
of State or Government decided on a Compact for Growth and Jobs, providing a
coherent framework for action at national, EU and euro area levels using all
possible levers, instruments and policies. They decided on action to be taken
at the level of the Member States, in particular expressing full commitment to
achieving the objectives of the Europe 2020 Strategy and to implementing the
country-specific recommendations.

(4)       On 6 July 2012, the
Council adopted a recommendation on the Czech Republic’s national reform
programme for 2012 and delivered its opinion on the Czech Republic’s updated
convergence programme for 2011-2015.

(5)       On 28 November 2012, the
Commission adopted the Annual Growth Survey[5],
marking the start of the 2013 European Semester for economic policy
coordination. Also on 28 November 2012, the Commission, on the basis of
Regulation (EU) No 1176/2011, adopted the second Alert Mechanism Report[6], in which it did not identify
the Czech Republic as one of the Member States for which an in-depth review
would be carried out.

(6)       On 14 March 2013, the
European Council endorsed the priorities for ensuring financial stability,
fiscal consolidation and action to foster growth. It underscored the need to
pursue differentiated, growth-friendly fiscal consolidation, to restore normal
lending conditions to the economy, to promote growth and competitiveness, to
tackle unemployment and the social consequences of the crisis, and to modernise
public administration.

(7)       On 26 April 2013, the
Czech Republic submitted its 2013 convergence programme covering the period 2013-2016
and, on 17 April 2013, its 2013 national reform programme. In order to take
account of their interlinkages, the two programmes have been assessed at the
same time.

(8)       Based on the assessment of
the 2013 convergence programme pursuant to Council Regulation (EC) No 1466/97,
the Council is of the opinion that the Czech Republic has reduced the headline deficit
by 1.4% of GDP from 2009 to 2012 due to substantial consolidation efforts and
that, based on current expectations, it is on track to correct the excessive
deficit. The macroeconomic scenario underpinning the budgetary projections in
the programme is plausible. According to the convergence programme, real
GDP growth is expected to be at 0% and 1.2% in 2013 and 2014, respectively,
compared to -0.4% and 1.6 % in 2013 and 2014 respectively in the Commission
2013 spring forecast. The objective of the budgetary strategy outlined in the
programme is to keep the general government deficit below the 3% of GDP
reference value. The general government deficit target of 2.9% of GDP in 2013
is in line with the deadline for correcting the excessive deficit set out in
the Council recommendation of 2 December 2009. The Commission 2013 spring
forecast projects the government deficit at 2.9% and 3% of GDP in 2013 and 2014,
respectively. There is a risk of worse-than-expected budgetary outcome in 2013
stemming from additional corrections in EU funds reimbursements. On the
positive side, one-off revenues related to the planned auction of new telecom
frequency bands could result in a better-than-expected budgetary outcome in
2013. The convergence programme confirms the previous medium-term
objective of a deficit of 1% of GDP, which adequately reflects the requirements
of the Stability and Growth Pact. The (recalculated) structural budget deficit
is projected to increase by 0.3%, 0.2% and 0.5% of GDP in 2014, 2015 and 2016
respectively; therefore no adjustment towards the medium-term objective is
foreseen in the programme, which is not in line with the Stability and Growth
Pact. The rate of growth of government expenditure complies with the
expenditure benchmark of the Stability and Growth Pact in 2014 but deviates by
0.3% and 0.5% of GDP in 2015 and 2016 respectively. According to the
convergence programme, the debt-to-GDP ratio is forecast to continue to
increase over the programme period, albeit at a slowing pace, and to reach 51.9%
of GDP in 2016.

(9)       Swift and durable recovery
is hindered in the Czech Republic by repeated cuts in public investment
expenditure. Safeguarding growth-enhancing expenditure with a high
multiplicative effect, including projects co-financed by EU funds, would not
only help buttress recovery but could also contribute to tackling the long-term
challenges. Substantial growth effects could follow from prioritising
expenditure on measures aiming at increasing employment, research and
innovation, education, childcare facilities and infrastructure projects. At the
same time, ensuring legality, regularity and efficiency of such spending is
key.

(10)     Limited progress was made
in 2012 on tax reform. While the real estate transfer tax was increased, no
steps were taken to raise the very low level of recurrent property taxes. Plans
to introduce a CO2 tax and abolish exemptions from excise duties on natural gas
for heating have been dropped. The implicit tax rate on energy is below the EU
average and vehicle circulation taxes remain very low. Structural challenges
also remain in taxation of labour, in particular affecting low-income earners
and part-time workers. Only marginal steps were taken to reduce discrepancies
in the tax treatment of employees and the self-employed. The Czech Republic also has room to further improve the efficiency of its tax administration. As
regards personal and company income taxes, the government is planning to
establish a Single Collection Point in 2015, which could effectively streamline
the tax administration and help reduce the complexity of the current system.
However, a drawback of the reform is that the tax bases for personal income
tax, health and social contributions will not be harmonised, thereby leaving a
large part of the potential benefits of the reform unexploited.

(11)     The Czech Republic has a sustainability gap of 5.0 % of GDP, which is above the EU average. This gap
largely reflects the projected long-term cost of ageing, which is driven by the
expected increases in pension expenditure and in health and long-term care
spending. An important source of the unsustainable increase in pension
expenditure lies in the slow rate at which the statutory retirement age is
being raised, in particular for men. Ensuring that the statutory retirement age
increases more rapidly compared to current legislation and linking it to life
expectancy would significantly strengthen the sustainability of the system. Moreover,
an indexation formula based on prices, when implemented over the long run, would
generate substantial savings and at the same time preserve the purchasing power
of pensioners.

(12)     Contrary to the 2012
country-specific recommendation, the government introduced a pre-retirement
scheme in 2013, which offers the possibility of drawing a pension up to five
years before reaching the statutory retirement age. The pre-retirement pensions
are going to be paid from the (third) pension savings pillar. However, the
pillar enjoys a substantial state subsidy through direct co-payments and tax
deductibility of contributions. Irrespective of whether the eligibility
criteria for gaining access to the scheme will be effectively met by only a limited
number of persons, as the government expects, the measure allows beneficiaries
to use the previously accrued public subsidy for a purpose that goes against
policies to promote longer working lives.

(13)     The expected increase in
health and long-term care spending also provides a substantial contribution to
the cost of ageing and the large sustainability gap. Reforms aimed at improving
the efficiency of the health system via cost containment and more
market-oriented solutions have been implemented in recent years in the Czech Republic. However, problems still exist. Compared to other Member States, the Czech
healthcare system tends to be excessively centred on hospital care, which gives
rise to inefficiencies. There is scope to improve the provision of care in the
most clinically appropriate and cost-effective way, for example by moving to
day-of-surgery admission and reducing inappropriate lengths of stay in acute
care hospitals.

(14)     Recent OECD projections
show that full convergence of the female and male employment rates would halt
the projected decline of the total labour force and increase GDP per capita by
as much as 16.5 % by 2030. The government has proposed a draft Act on 22
May 2013 to introduce private ‘child groups’ led by professional nannies,
accompanied by tax subsidies for care providers and participating families. This
is a step in the right direction but is only a partial response to the issue.
Despite a continued shortage of childcare facilities, in particular for under
three year olds, there are no plans to increase budgetary support to public
pre-school childcare facilities. The employability and labour market
participation of disadvantaged people also remains a problem: there is scope
for increasing the efficiency and effectiveness of public employment services.

(15)     The 2012 country-specific
recommendation on public administration specifically mentioned the need to increase
the efficiency of public administration and step up the fight against
corruption. However, only limited progress has been made in adopting the
priority legal acts under the Czech anti-corruption strategy for 2011-12. A new
anti-corruption strategy for 2013-14, adopted by the government in January
2013, needs to be followed up by the urgent adoption of outstanding priority
acts, such as the Public Servants Act. This new legislation will need to adequately
separate political appointees from non-political staff, guarantee independence
of state officials and create a well-functioning career system to reduce high
staff turnover. The Czech Republic has made substantial progress in
implementing the Public Procurement Act, which came into force in April 2012.
However, difficulties in implementing the Act have been reported by local
authorities. As regards the implementation of EU funds, most of the measures
included in the action plan to strengthen the management and control system
were implemented by the end of 2012. However, the Czech authorities will need
to ensure continuous monitoring of the action plan.

(16)     At the level of compulsory
education, Czech pupils attain broadly average results in international
comparisons. In mathematics and science, however, the education outcomes have
worsened rapidly over time. The Czech authorities have responded with a set of
measures which entails the development of minimum education standards, which
are to be used for nationwide testing of pupils. However, a more integrated
system should be developed, ensuring that pupils, teachers and schools that
underperform in the tests receive systematic support would further raise the
level of ambition of the reform. The main challenge facing the Czech higher education
system is to ensure that the rising number of students is equipped with the skills
needed to succeed in the labour market. A reform of the Higher Education Act is
being discussed to introduce differentiated funding arrangements and enhance
accreditation. These are relevant and ambitious proposals, although their
actual impact will depend on the final design of the reform. The authorities
also plan to adopt revised evaluation standards for funding of research
institutions. Increasing the share of quality indicators, including enhancing
the collaboration with the business sector, would help the Czech research and
innovation system reach a higher level of excellence.

(17)     The Czech Republic is amongst the EU Member States with the highest number of regulated professions. A
public consultation on the review of the regulatory framework for professions was
conducted in 2012 and results are to be presented in 2013. This is an important
step in order to reduce or eliminate barriers to those professions for which
regulation is not proven necessary or considered excessive (including the
length of mandatory traineeships) and for which an easier access could unlock
further employment and growth. Despite improvements in recent years, the Czech Republic has still one of the highest energy intensity in the EU, in particular in
the buildings and energy sector.

(18)     In the context of the
European Semester, the Commission has carried out a comprehensive analysis of
the Czech Republic’s economic policy. It has assessed the convergence programme
and national reform programme. It has taken into account not only their
relevance for sustainable fiscal and socio-economic policy in the Czech
Republic but also their compliance with EU rules and guidance, given the need
to reinforce the overall economic governance of the European Union by providing
EU-level input into future national decisions. Its recommendations under the
European Semester are reflected in recommendations (1) to (7) below.

(19)     In the light of this
assessment, the Council has examined the Czech Republic’s convergence
programme, and its opinion[7]
is reflected in particular in recommendation (1) below,

HEREBY RECOMMENDS that the Czech Republic should take action within the period 2013-2014 to:

1.           Implement as envisaged the
budget for the year 2013 so as to correct the excessive deficit in 2013 in a
sustainable manner and achieve the structural adjustment effort specified in
the Council recommendations under the EDP. For the year 2014 and beyond,
reinforce and rigorously implement the budgetary strategy, supported by
sufficiently specified measures, to ensure an adequate fiscal effort to make
sufficient progress towards the medium-term objective. Prioritise
growth-enhancing expenditure including committing on time remaining projects
co-financed with EU funds under the current financial framework.

2.           Reduce the high level of
taxation on labour by shifting taxation to areas less detrimental to growth, such
as recurrent taxes on housing and vehicle circulation taxes. Further reduce
discrepancies in the tax treatment of employees and the self-employed. Improve
tax compliance and reduce compliance costs by establishing the Single
Collection Point and harmonising the tax bases for personal income tax and
social and health contributions.

3.           Speed up the increase of the
statutory retirement age compared to current legislation, introduce a clear
link between the statutory retirement age and life expectancy, and revise the
indexation mechanism. Accompany the increase in retirement age with measures
promoting employability of older workers and reduce early exit pathways. In
particular, remove the public subsidy for the pre-retirement scheme. Take
measures to significantly improve cost-effectiveness of healthcare expenditure,
in particular for hospital care.

4.           Take measures to strengthen
the efficiency and effectiveness of the public employment service. Increase
significantly the availability of inclusive childcare facilities with a focus
on children up to three years old, and the participation of Roma children, notably
by adopting and implementing the law on private childcare facilities and
strengthening the capacities of public childcare facilities.

5.           Ensure implementation of
the anti-corruption strategy for 2013-2014. Adopt a Public Servants Act that
should ensure a stable, efficient and professional state administration
service. Improve the management of EU funds in view of the 2014-2020
programming period. Strengthen the capacity for implementation of public
tenders at local and regional level.

6.           Establish a comprehensive
evaluation framework in compulsory education and take targeted measures to
support schools that rank low in educational outcomes. Adopt measures to
enhance accreditation and funding of higher education. Increase the share of
performance-based funding of research institutions.

7.           Drawing on the on-going
review, proceed with a reform of regulated professions, by reducing or
eliminating entry barriers and reserves of activities where they are
unjustified. Take further measures to improve energy efficiency in the
buildings and industry sectors.

Done at Brussels,

For
the Council

The
President

[1]               OJ L 209, 2.8.1997, p. 1.

[2]               COM(2013) 353 final.

[3]               P7_TA(2013)0052 and P7_TA(2013)0053.

[4]               Council Decision 2013/208/EU of 22 April 2013.

[5]               COM(2012) 750 final.

[6]               COM(2012) 751 final.

[7]               Under Article 9(2) of Council Regulation (EC) No
1466/97.